Currently a large marketing tool for both manufacturers and supermarket chains is the production, distribution and redemption of the retail, paper, product coupon. Manufacturers use coupons to stimulate consumers to purchase products by creating product awareness, prompting product trials or rewarding repeat product purchases. This results in manufacturers printing and distributing hundreds of billions of paper coupons a year. This practice of paper coupon distribution is widely considered to be inefficient, as well as a producer of large quantities of redemption fraud.
The first step in the coupon redemption process is the retrieval of paper coupons by the consumer from the newspaper Free Standing Inserts (FSIs) in which the coupons are published. Currently, the vast majority of the coupons that are included in FSIs each week in the United States go unredeemed. 1995's redemption rate stood at approximately 1.9 percent of all coupons distributed. The primary reason for low coupon redemption is that couponing is time-consuming for people. The use of the paper coupon requires the consumer to sit down each week, examine coupon FSIs, and cut out the coupons they want to use. This is not the only disincentive for consumers to use coupons. It is also estimated that coupons received at the time of checkout in the supermarket (which are related to purchases and do not need to be chosen or removed from an FSI) are only redeemed at approximately an 8 percent rate. This suggests that even when not required to cut coupons out of FSI's, consumers consider coupons too much trouble to constantly organize and carry about. The redeeming of paper coupons requires even more effort since the consumer must determine which coupons he has that match items on his shopping list or that match items which he has purchased. While many companies sell coupon organizers, coupon categorizers and coupon alphabetizers, these methods still require coupon clipping, constant coupon organization and maintenance (removing expired coupons). The ineffectiveness of these methods is evidenced by the consistently low redemption rates. Still another reason why coupons go unredeemed is because the consumer simply forgets and leaves the coupons at home when he goes shopping. This is even more likely to occur as shopping trips are increasingly incorporated into the drive home from work or the like rather than a specially planned trip to the supermarket. Thus the consumer loses any possible benefit of coupon discounts. As a result of these difficulties, the majority of consumers do not investigate FSIs for coupons and consequently, advertising dollars manufacturers spend on FSIs provide comparatively little promotional benefit. Therefore, while per page FSI costs are low, the inefficiency of paper couponing makes it a very expensive form of advertising.
Even after the consumer reaches the supermarket with his coupons, there are further problems with the present paper-based system. The most common system of redeeming coupons requires a paper coupon to be presented to a cashier when the consumer is checking out. The cashier scans the coupon bar code with a scanner associated with the cash register and the cash register software identifies whether the coupon corresponds to an item just purchased. When the consumer has numerous coupons, the individual scanning of each coupon can be very time consuming, delaying all other consumers waiting in line. This delay is greatly exacerbated when the cash register indicates that no corresponding product has been purchased for one or more of the coupons, stopping the transaction. To discover why a coupon is not appropriate, the cashier must examine the coupon and then review the cash register receipt to determine what aspect of the purchased product does not meet the coupon redemption requirements. In the case where the cashier desires to accept the inappropriate coupon as a customer service gesture, the cashier must “override” the cash register's rejection of the coupon. Typically this requires the pressing of several additional keys on the cash register. When this entire process must be repeated for multiple coupons not accepted by the cash register, which is common in the majority of transactions in which coupons are used, the delay disrupts the entire checkout process delaying consumer checkout and negatively affecting transaction speed, customer service and front-end productivity.
Further problems and inefficiencies in the coupon redemption process arise after the retailer has accepted the coupons from consumers. The retailer must determine the total value of each manufacturer's coupons the retailer has redeemed in order for the retailer to be reimbursed by the manufacturer. The method or doing this varies widely among retailers. Some retailers may have employees hand sort the coupons at the retailer's location. Other retailers may make no effort themselves to organize the coupons and keep records of what coupons have been redeemed. In either case, retailers periodically, such as on a weekly basis, collect all redeemed paper coupons and deliver the coupons to a third-party clearinghouse. At the clearinghouse, coupons are generally sorted either by hand, or perhaps by scanning, in order to determine what coupons belong to which manufacturer and the amount the manufacturer owes the retailer for redeeming the coupons. After the coupons are returned to the manufacturer, the manufacturer may again sort the coupons (using its own employees or another clearinghouse) to insure all the coupons are the manufacturer's. The manufacturer then recalculates the total value of the coupons in order to verify the amount the retailer claims is owed on the redeemed coupons. This process is completed for every one of the billions of coupons redeemed annually. By the time the coupons have been collected by the retailer, passed through one and possibly two clearinghouses, and the manufacture reimburses the retailer, several weeks or months may have passed. This results in a considerable disadvantage to the retailer since the time between when the retailer gives the consumer the coupon discount and when the manufacturer reimburses the retailer is, in effect, an interest-free loan to the manufacturer. The manufacturer also suffers from the slow redemption process since the manufacturer cannot determine the effect of the coupon promotion until the manufacturer receives information on the number of coupons redeemed. Therefore, it is impossible for a manufacturer to quickly react to product performance, coupon redemption rates, or market changes.
In addition to the legitimate redeeming process being cumbersome, there exists wide spread problems with fraudulent misredemption and malredemption. Misredemption occurs where a retailer accepts a coupon for a product that has not been purchased. When done on a selective basis as a customer service gesture, such misredemption may serve the retailer and manufacturer sufficiently to justify the fraud. For example, a coupon may be accepted where the customer has attempted to comply with the coupon but has mistakenly selected a size or quantity of the product which does not match what is called for by the coupon. However, the situation may arise where retailer personnel may accept large numbers of coupons that are not closely related to the products bought by the consumer. In such a case, the manufacturer eventually (whether initially or through an invoice reduction by the retailer following a manufacturer's refusal to pay) reimburses the retailer while receiving no corresponding benefit in sales. Some misredemption occurs internally by retail employees, and is fought by the retailer. In other cases, the retailer is intentionally involved in misredemption to increase profits. When retailers can not provide the appropriate invoices to support such coupon submissions, they are placed on suspend lists by the affected manufacturers and their coupons are no longer accepted for reimbursement. Such fraud prevention by manufacturers requires large financial resources for the staffing of coupon fraud reduction departments. Misredemption can run into the double digits for retailers, and manufacturers are plagued with the costs of paying for and preventing it. Malredemption is another type of coupon fraud often practiced on an even larger scale. Malredemption is the large scale collection of coupons which are then directly submitted to the manufacturer for reimbursement with the coupons never actually passing through consumers. Typically malredemption is carried out by illegitimate retailers acting as a “front” for persons who have set up mass coupon clipping systems. Together misredemption and malredemption cost manufacturers hundreds of millions of dollars annually.
Another disadvantage of the present paper coupon redemption system is that if consumer response to the coupon offer is not what the manufacturer had anticipated and the manufacturer wishes to restimulate consumers with a higher coupon discount, the manufacture must publish a whole new coupon “drop. The previously printed coupons, therefore, become a largely wasted marketing effort. Additionally, it is difficult to track the buying habits of consumers on a national level because those who purchase with cash are not recorded by conventional marketing database collection. On a local level, frequent shopper cards allow demographic and buying history profiles to be compiled on cash purchases, but this has not worked well on the national level.